How Safe Is Your Money In HSBC Holdings plc?

It calls itself ‘the world’s local bank’, but is it the world’s safest bank? Roland Head takes a closer look at HSBC Holdings plc (LON:HSBA).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

hsbc

HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) disappointed investors recently when its results came in short of expectations, but in my view the resulting price weakness has been an excellent buying opportunity for long-term investors, and I recently added more HSBC shares to my own portfolio.

The long-term growth story for HSBC is clear — it’s one of the biggest global trading banks, and its strong presence in China and Hong Kong places it at the centre of the world’s largest and fastest-growing economies.

However, what about the other side of the coin? Is HSBC strong enough to deal with short-term financial shocks and regional slowdowns? To find out more, I’ve taken a look at three key financial ratios, of the kind often used by credit ratings agencies.

1. Net interest margin

Net interest margin is a core measure of banking profitability, and captures the difference between the interest a bank pays on its deposits, and the interest it earns on its loans.

HSBC reported a net interest margin of 2.1% in 2013, down from 2.4% in 2012. The fall was triggered by the disposal of some high-margin businesses in North America, and by a drop in interest income in Latin America. However, I’m not too concerned by this — in my view, any short-term weakness in Latin America is easily outweighed by this region’s long-term growth potential.

2. Tier 1 capital ratio

Tier 1 capital is essentially a measure of a bank’s retained profits and its equity (book value). One of the requirements of the new Basel III banking rules, which come into force in 2015, is that banks will have to meet new, tougher, tier 1 capital standards.

HSBC reported a common equity tier 1 ratio under the expected new rules of 10.9%, substantially above the minimum required, and 15% higher than last year’s reported ratio of 9.5%.

3. Return on equity

Return on equity (RoE) is a useful way to measure the performance of financial firms, as it shows how much profit was generated compared to the book value (equity) of the firm.

HSBC reported a RoE of 9.2% in 2013, up from 8.4% in 2012. Although satisfactory, this is substantially below the 12-15% level targeted by the bank, suggesting ongoing growth may be slower than expected.

One factor in this may be HSBC’s scale — with equity of $190bn, a 15% RoE equates to profits of around $28bn!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Roland owns shares in HSBC Holdings.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »